Global Water Resources, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS GLOBAL WATER RESOURCES, INC. CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except share and per share amounts) (Unaudited) March 31, 2023 December 31, 2022 ASSETS PROPERTY, PLANT AND EQUIPMENT: Land $ 1,480 $ 1,480 Depreciable property, plant and equipment 369,051 344,043 Construction work-in-progress 70,732 66,039 Other 697 697 Less accumulated depreciation ( 134,512 ) ( 124,522 ) Net property, plant and equipment 307,448 287,737 CURRENT ASSETS: Cash and cash equivalents 1,907 6,561 Accounts receivable — net 2,583 2,139 Customer payments in-transit 211 462 Unbilled revenue 2,674 2,557 Taxes, prepaid expenses, and other current assets 1,402 2,439 Total current assets 8,777 14,158 OTHER ASSETS: Goodwill 10,929 4,957 Intangible assets — net 10,146 10,139 Regulatory asset 3,162 3,169 Restricted cash 1,144 1,001 Right-of -use asset 1,795 1,891 Other noncurrent assets 34 34 Total other assets 27,210 21,191 TOTAL ASSETS $ 343,435 $ 323,086 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,690 $ 2,173 Accrued expenses 9,661 8,056 Customer and meter deposits 1,669 1,682 Long-term debt — current portion 3,833 3,833 Leases — current portion 498 505 Total current liabilities 17,351 16,249 NONCURRENT LIABILITIES: Line of credit 3,500 — Long-term debt 104,957 104,945 Long-term lease liabilities 1,509 1,616 Deferred revenue - ICFA 18,774 20,974 Regulatory liability 6,366 6,371 Advances in aid of construction 101,197 93,656 Contributions in aid of construction — net 33,730 26,404 Deferred income tax liabilities, net 6,685 5,949 Acquisition liability 3,103 1,773 Other noncurrent liabilities 882 755 Total noncurrent liabilities 280,703 262,443 Total liabilities 298,054 278,692 Commitments and contingencies (Refer to Note 15) SHAREHOLDERS' EQUITY: Common stock, $ 0.01 par value, 60,000,000 shares authorized; 24,095,139 and 24,095,139 shares issued as of March 31, 2023 and December 31, 2022, respectively. 239 239 Treasury stock, 224,093 and 224,093 shares at March 31, 2023 and December 31, 2022, respectively. ( 2 ) ( 2 ) Paid in capital 44,456 44,157 Retained earnings 688 — Total shareholders' equity 45,381 44,394 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 343,435 $ 323,086 See accompanying notes to the condensed consolidated financial statements -3- T a b l e o f C o n t e n t s GLOBAL WATER RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OPERATIONS (in thousands, except share and per share amounts) (Unaudited) Three Months Ended March 31, 2023 2022 REVENUES: Water services $ 4,839 $ 4,348 Wastewater and recycled water services 6,021 5,681 Unregulated revenues 2,268 — Total revenues 13,128 10,029 OPERATING EXPENSES: Operations and maintenance 2,789 2,543 General and administrative 3,907 3,780 Depreciation and amortization 2,655 2,343 Total operating expenses 9,351 8,666 OPERATING INCOME 3,777 1,363 OTHER INCOME (EXPENSE): Interest expense ( 1,296 ) ( 1,326 ) Allowance for equity funds used during construction 299 — Allowance for borrowed funds used during construction 128 121 Other - Net 423 1,074 Total other expense ( 446 ) ( 131 ) INCOME BEFORE INCOME TAXES 3,331 1,232 INCOME TAX (EXPENSE) ( 865 ) ( 343 ) NET INCOME $ 2,466 $ 889 Basic earnings per common share $ 0.10 $ 0.04 Diluted earnings per common share $ 0.10 $ 0.04 Dividends declared per common share $ 0.07 $ 0.07 Weighted average number of common shares used in the determination of: Basic 23,871,046 22,649,215 Diluted 24,026,617 22,901,232 See accompanying notes to the condensed consolidated financial statements -4- T a b l e o f C o n t e n t s GLOBAL WATER RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share and per share amounts) (Unaudited) Common Stock Shares Common Stock Treasury Stock Shares Treasury Stock Paid-in Capital Retained Earnings Total Equity BALANCE - December 31, 2021 22,832,013 228 ( 182,445 ) ( 2 ) 29,803 — 30,029 Dividend declared $ 0.07 per share — — — — ( 781 ) ( 889 ) ( 1,670 ) Stock option exercise 250 — — — 3 — 3 Stock compensation — — — — 389 — 389 Net income — — — — — 889 889 BALANCE - March 31, 2022 22,832,263 228 ( 182,445 ) ( 2 ) 29,414 — 29,640 BALANCE - December 31, 2022 24,095,139 239 ( 224,093 ) ( 2 ) 44,157 — 44,394 Dividend declared $ 0.07 per share — — — — — ( 1,778 ) ( 1,778 ) Stock compensation — — — — 299 — 299 Net income — — — — — 2,466 2,466 BALANCE - March 31, 2023 24,095,139 239 ( 224,093 ) ( 2 ) 44,456 688 45,381 See accompanying notes to the condensed consolidated financial statements -5- T a b l e o f C o n t e n t s GLOBAL WATER RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Three Months Ended March 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income 2,466 $ 889 Adjustments to reconcile net income to net cash provided by operating activities: Deferred compensation 286 498 Depreciation and amortization 2,655 2,343 Right of use amortization 113 — Amortization of deferred debt issuance costs and discounts 11 11 (Gain) Loss on disposal of fixed assets ( 11 ) ( 8 ) Provision for doubtful accounts receivable 19 26 Deferred income tax expense 738 151 Changes in assets and liabilities Accounts receivable ( 393 ) 41 Other current assets 1,181 ( 452 ) Accounts payable and other current liabilities 1,225 74 Other noncurrent assets 82 20 Other noncurrent liabilities ( 1,888 ) 1,778 Net cash provided by operating activities 6,484 5,371 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 6,540 ) ( 6,169 ) Cash paid for acquisitions, net of cash acquired ( 6,246 ) ( 85 ) Net cash used in investing activities ( 12,786 ) ( 6,254 ) CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid ( 1,779 ) ( 1,670 ) Advances in aid of construction 202 1,076 Proceeds from stock option exercise — 3 Principal payments under finance lease ( 132 ) ( 28 ) Line of credit borrowings, net 3,500 — Net cash provided by (used in) financing activities 1,791 ( 619 ) INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 4,511 ) ( 1,502 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period 7,562 13,443 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – End of period 3,051 11,941 See accompanying notes to the condensed consolidated financial statements Supplemental disclosure of cash flow information: Three Months Ended March 31, 2023 2022 Cash and cash equivalents $ 1,907 $ 11,135 Restricted Cash 1,144 806 Total cash, cash equivalents, and restricted cash $ 3,051 $ 11,941 -6- T a b l e o f C o n t e n t s GLOBAL WATER RESOURCES, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION, CORPORATE TRANSACTIONS, SIGNIFICANT ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS Basis of Presentation and Principles of Consolidation The condensed consolidated financial statements of Global Water Resources, Inc. (the “Company”, “GWRI”, “we”, “us”, or “our”) and related disclosures as of March 31, 2023 and for the three months ended March 31, 2023 and 2022 are unaudited. The December 31, 2022 condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These financial statements follow the same accounting policies and methods of their application as the Company’s most recent annual consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2022. In the Company's opinion, these financial statements include all normal and recurring adjustments necessary for the fair statement of the results for the interim period. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the full year, due to the seasonality of our business. The Company prepares its financial statements in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Corporate Transactions Arizona Corporation Commission (" ACC") Rate Case On July 27, 2022, the ACC issued Rate Decision No. 78644 relating to the Company's recent rate case. Pursuant to Rate Decision No. 78644, the ACC approved, among other things, a collective annual revenue requirement increase of approximately $ 2.2 million (including the acquisition premiums discussed below) based on 2019 test year service connections, and phased-in over approximately two years . The ACC also approved: (i) the consolidation of water and/or wastewater rates to create economies of scale that are beneficial to all customers when rates are consolidated; (ii) acquisition premiums relating to the Company’s acquisitions of its Red Rock and Turner Ranches utilities, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement included in the table above; (iii) the Company’s ability to annually adjust rates to flow through certain changes in tax expense, primarily related to income taxes, without the necessity of a rate case proceeding; and (iv) a sustainable water surcharge, which will allow semiannual surcharges to be added to customer bills based on verified costs of new water resources. Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” for additional information. Public Offering of Common Stock On August 1, 2022, the Company completed a public offering of 1,150,000 shares of common stock at a public offering price of $ 13.50 per share, which included 150,000 shares issued and sold to the underwriter following the exercise in full of its option to purchase additional shares of common stock. The Company received net proceeds of approximately $ 14.9 million from the offering after deducting underwriting discounts and commissions and offering expenses paid by the Company. Certain directors and/or their affiliates purchased an aggregate of the 652,000 shares of common stock at the public offering price. Recent Acquisitions On February 1, 2023, the Company acquired all of the equity of Farmers Water Co. ("Farmers"), an operator of a water utility with service area in Pima County, Arizona. The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles service area in Sahuarita, Arizona and the surrounding unincorporated area of Pima County at the time of the acquisition. -7- T a b l e o f C o n t e n t s Stipulated Condemnation of the Operations and Assets of Valencia Water Company, Inc. On July 14, 2015, the Company closed the stipulated condemnation to transfer the operations and assets of Valencia Water Company, Inc. ("Valencia") to the City of Buckeye. Terms of the condemnation were agreed upon through a settlement agreement and stipulated final judgment of condemnation wherein the City of Buckeye acquired all the operations and assets of Valencia and assumed operation of the utility upon close. The City of Buckeye is obligated to pay the Company a growth premium equal to $ 3,000 for each new water meter installed within Valencia’s prior service areas in the City of Buckeye, for a 20-year period ending December 31, 2034, subject to a maximum payout of $ 45.0 million over the term of the agreement. The Company received growth premiums of $ 0.4 million and $ 1.1 million for the three months ended March 31, 2023 and 2022, respectively. Significant Accounting Policies Basic and Diluted Earnings per Common Share Basic earnings per share (“EPS”) in each period of this report were calculated by dividing net income by the weighted-average number of shares during those periods. Diluted EPS includes additional weighted-average common stock equivalents (options and restricted stock awards), if dilutive. Unless otherwise noted, the term “earnings per share” refers to basic EPS. A reconciliation of the denominator used in basic and diluted EPS calculations is shown in the following table: (In thousands) March 31, 2023 March 31, 2022 Basic weighted average common shares outstanding 23,871 22,649 Effect of dilutive securities: 2017 Option grant 97 128 2019 Option grant 27 51 2020 Restricted stock awards 11 58 2021 Restricted stock awards 21 15 Total dilutive securities 156 252 Diluted weighted average common shares outstanding 24,027 22,901 Anti-dilutive shares excluded from earnings per diluted shares (1) — — (1) Shares excluded from the dilutive-effect calculation because the outstanding awards' exercise prices were greater than the average market price of the Company's common stock. Recent Accounting Pronouncements Recently Adopted Accounting Standards In June of 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changed the impairment model for certain financial assets that have a contractual right to receive cash, including trade and loan receivables. The new model required recognition based upon an estimation of expected credit losses rather than recognition of losses based on the probability of occurrence. The Company is a Public Business Entities that is a Smaller Reporting Companies, and therefore ASU 2016-13 was effective for annual reporting periods beginning after December 15, 2022 . The Company adopted the standard utilizing the modified retrospective method for its trade receivables and unbilled revenue on January 1, 2023. Based on the composition of the Company’s trade receivables and unbilled revenue, and expected future losses, the adoption of ASU 2016-13 is not expected to have a material impact on its consolidated financial statements. 2. REGULATORY DECISION AND RELATED ACCOUNTING AND POLICY CHANGES The Company's regulated utilities and certain other balances are subject to regulation by the ACC and meet the requirements for regulatory accounting found within ASC 980, Regulated Operations . In accordance with ASC 980, rates charged to utility customers are intended to recover the costs of the provision of service plus a reasonable return in the same period. Changes to the rates are made through formal rate applications with the ACC, which the Company has done for all of the operating utilities and which are described below. -8- T a b l e o f C o n t e n t s On July 27, 2022, the ACC issued Rate Decision No. 78644 relating to the Company's recent rate case. Pursuant to Rate Decision No. 78644, the ACC approved, among other things, a collective annual revenue requirement increase of approximately $ 2.2 million (including the acquisition premiums discussed below) based on 2019 test year service connections, and phased-in over approximately two years, as follows: Incremental Cumulative August 1, 2022 $ 1,457,462 $ 1,457,462 January 1, 2023 $ 675,814 $ 2,133,277 January 1, 2024 $ 98,585 $ 2,231,861 To the extent that the number of active service connections has increased and continues to increase from 2019 levels, the additional revenues may be greater than the amounts set forth above. On the other hand, if active connections decrease or the Company experiences declining usage per customer, the Company may not realize all of the anticipated revenues. Rate Decision No. 78644 also addressed the primary impacts of the Federal Tax Cuts and Jobs Act (the "TCJA") on the Company, which is the reduction of the federal income tax rate from 35 percent to 21 percent beginning on January 1, 2018. The TCJA required the Company to re-measure all existing deferred income tax assets and liabilities to reflect the reduction in the federal tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates are expected to be recovered from or refunded to customers. On September 20, 2018, the ACC issued Rate Decision No. 76901, which set forth the reductions in revenue for the Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities due to the TCJA. Rate Decision No. 76901 adopted a phase-in approach for the reductions to match the phase-in of the revenue requirements under Rate Decision No. 74364. In 2021, the final year of the phase-in, the aggregate annual reductions in revenue for the Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities were approximately $ 415,000 , $ 669,000 , $ 16,000 , and $ 5,000 , respectively. The ACC also approved a carrying cost of 4.25 % on regulatory liabilities resulting from the difference of the fully phased-in rates to be applied in 2021 versus the years leading up to 2021 (i.e., 2018 through 2020). Rate Decision No. 76901, however, did not address the impacts of the TCJA on accumulated deferred income taxes (“ADIT”), including excess ADIT (“EADIT”). Subsequently, Rate Decision No. 78644 approved an adjustor mechanism for income taxes. The adjustor mechanism permits the Company to flow through potential changes to state and federal income tax rates as well as refund or collect funds related to TCJA. The ACC also approved: (i) the consolidation of water and/or wastewater rates to create economies of scale that are beneficial to all customers when rates are consolidated; (ii) acquisition premiums relating to the Company’s acquisitions of its Red Rock and Turner Ranches utilities, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement included in the table above; (iii) the Company’s ability to annually adjust rates to flow through certain changes in tax expense, primarily related to income taxes, without the necessity of a rate case proceeding; and (iv) a sustainable water surcharge, which will allow semiannual surcharges to be added to customer bills based on verified costs of new water resources. Finally, Rate Decision No. 78644 requires the Company to work with ACC staff and the Residential Utility Consumer Office to prepare a Private Letter Ruling request to the Internal Revenue Service (“IRS”) to clarify whether the failure to eliminate the deferred taxes attributable to assets condemned in a transaction governed by Section 1033 of the Internal Revenue Code ("IRC") would violate the normalization provisions of Section 168(i)(9) of the IRC. If the IRS accepts the request and issues its ruling, a copy must be provided to the ACC. Within 90 days after providing the ruling to the ACC, ACC Staff shall prepare, for ACC consideration, a memorandum and proposed order regarding guidance issued within the Private Letter Ruling. This may result in further action by the ACC, which the Company is unable to predict due to the uncertainties involved, that could have an adverse impact on its financial condition, results of operations and cash flows. Certain accounting implications related to Rate Decision No. 78644 were recognized and recorded as of June 30, 2022, and are as follows: -9- T a b l e o f C o n t e n t s • Reclassification of Red Rock Water, Red Rock Wastewater, and Turner Ranches acquisition premiums of approximately $ 0.8 million in the aggregate from goodwill to regulatory assets to be included in rate base. The premiums are to be amortized over 25 years. • Reversal of the 2017 TCJA tax reform regulatory liability of approximately $ 0.8 million, which was recorded as a reduction to income tax expense for approximately $ 0.7 million, and as a reduction to interest expense for approximately $ 0.1 million. • Write-off of approximately $ 0.3 million in capitalized rate case costs. Infrastructure Coordination and Financing Agreements (“ICFAs”) are agreements with developers and homebuilders where the Company provides services to plan, coordinate, and finance the water and wastewater infrastructure that would otherwise be required to be performed or subcontracted by the developer or homebuilder. Rate Decision No. 74364, issued by the ACC in February 2014, established the policy for the treatment of ICFA funds and also prohibited the Company from entering into any new ICFAs. Rate Decision No. 74364 requires a hook-up fee ("HUF") tariff to be established for all ICFAs that come due and are paid subsequent to December 31, 2013, which is a set amount per equivalent dwelling unit determined by the ACC based on the utility and meter size. In addition, since ICFA funds are generally received in installments, Rate Decision No. 74364 prescribes that 70 % of funds received must be recorded as a HUF liability, with the remaining 30 % to be recorded as deferred revenue, until the HUF liability is fully funded. The Company is responsible for assuring that the full HUF tariff, which is the set amount determined by the rate decision, is funded in the HUF liability, even if it results in recording less than 30% of the overall ICFA funds as deferred revenue. Refer to Note 3 – “Revenue Recognition - Unregulated Revenue” for additional information. The Company accounts for the portion allocated to the HUF as a contribution in aid of construction (“CIAC”). However, in accordance with the ACC directives, the CIAC is not deducted from rate base until the HUF funds are expended for utility plant. Such funds are segregated in a separate bank account and used for plant. A HUF liability is established and amortized as a reduction of depreciation expense over the useful life of the related plant once the HUF funds are utilized for the construction of plant. For facilities required under a HUF or ICFA, the utilities must first use the HUF moneys received, after which, it may use debt or equity financing for the remainder of construction. Regulatory Assets and Liabilities Regulatory assets and liabilities are the result of operating in a regulated environment in which the ACC establish rates that are designed to permit the recovery of the cost of service and a return on investment The Company capitalizes and records regulatory assets for costs that would otherwise be charged to expense if it is probable that the incurred costs will be recovered in future rates. Regulatory assets are amortized over the future periods that the costs are expected to be recovered. Final determination of whether a regulatory asset can be recovered is decided by the ACC in regulatory proceedings. If the Company determines that a portion of the regulatory assets is not recoverable in customer rates, the Company would be required to recognize the loss of the assets disallowed. If costs expected to be incurred in the future are currently being recovered through rates, the Company records those expected future costs are regulatory liabilities. The Company's regulatory assets and liabilities consist of the following (in thousands): Recovery Period March 31, 2023 December 31, 2022 Regulatory Assets Income taxes recoverable through future rates (1) Various $ 1,462 1,482 Rate case expense surcharge (2) 2 years 407 467 Acquisition premiums (3) 25 years 1,293 1,220 Total regulatory assets $ 3,162 $ 3,169 Regulatory Liabilities Income taxes payable through future rates (1) 503 508 Acquired ICFAs (4) 5,863 5,863 Total regulatory liabilities $ 6,366 $ 6,371 -10- T a b l e o f C o n t e n t s (1) The TCJA required the Company to re-measure all existing deferred income tax assets and liabilities to reflect the reduction in the federal tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates are expected to be recovered from or refunded to customers. (2) Rate Decision No. 78644, issued July 27, 2022, approved $ 500 K in rate case expenses to be recovered through a rate case expense surcharge over a two-year period. Rate Decision No. 78319, issued on December 3, 2021, approved an acquisition premium of $ 452 K to be amortized over 25 years related to the acquisition of Global Water - Rincon Water Company, Inc ("Rincon"). Amortization will begin once the Company finalizes the next rate case and the acquisition premium is included in customer rates. (3) Rate Decision No. 78644 approved acquisition premiums totaling $ 798 K related to the acquisitions of Global Water - Turner Ranches Irrigation, Inc. and Global Water - Red Rock Utilities Company, Inc. Amortization began in 2022 as the acquisition premiums were included in customer rates as approved in the decision. (4) The Acquired ICFA liability relates to the offset of intangible assets related to ICFA contracts obtained in connection with the Santa Cruz, Palo Verde, and Sonoran acquisitions. When ICFA funds are received, a portion of the funds reduce the Acquired ICFA liability as a partial offset to the amortization expense recognition of the related intangible asset. 3. REVENUE RECOGNITION Regulated Revenue The Company's operating revenues are primarily attributable to regulated services based upon tariff rates approved by the ACC. Regulated service revenues consist of amounts billed to customers based on approved fixed monthly fees and consumption fees, as well as unbilled revenues estimated from the last meter reading date to the end of the accounting period utilizing historical customer data recorded as accrued revenue. The measurement of sales to customers is generally based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, the Company estimates consumption since the date of the last meter reading and a corresponding unbilled revenue is recognized. The unbilled revenue estimate is based upon the number of unbilled days that month and the average daily customer billing rate from the previous month (which fluctuates based upon customer usage). The Company applies the invoice practical expedient and recognizes revenue from contracts with customers in the amount for which the Company has a right to invoice. The Company has the right to invoice for the volume of consumption, service charge, and other authorized charges. The Company satisfies its performance obligation to provide water, wastewater, and recycled water services over time as the services are rendered. Regulated services may be terminated by the customers at will, and, as a result, no separate financing component is recognized for the Company's collections from customers, which generally require payment within 15 days of billing. The Company applies judgment, based principally on historical payment experience, in estimating its customers' ability to pay. Total revenues do not include sales tax as the Company considers itself a pass-through conduit for collecting and remitting sales taxes. Unregulated Revenue Unregulated revenues represent those revenues that are not subject to the ratemaking process of the ACC. For the three months ended March 31, 2023 and March 31, 2022, unregulated revenues are limited to imputed revenues resulting from a portion of ICFA funds received. ICFAs are agreements with developers and homebuilders where the Company provides services to plan, coordinate, and finance the water and wastewater infrastructure that would otherwise be required to be performed or subcontracted by the developer or homebuilder. Services provided within these agreements include coordination of construction services for water and wastewater treatment facilities as well as financing, arranging, and coordinating the provision of utility services. In return, the developers and homebuilders pay the Company an agreed-upon amount per dwelling unit for the land legally described in the agreement, or a portion thereof. Under ICFA agreements, the Company has a contractual obligation to ensure physical capacity exists through its regulated utilities for the provision of water and wastewater utility service to the land when needed. This obligation persists regardless of connection growth. -11- T a b l e o f C o n t e n t s As these arrangements are with developers and not with the end water or wastewater customer, revenue recognition coincides with the completion of our performance obligations under the agreement with the developer and the regulated utilities ability to provide fitted capacity for water and wastewater service. Fees for these services are typically a negotiated amount per equivalent dwelling unit for the for the land legally described in the agreement, or a portion thereof. Payments are generally due in installments, with a portion due upon signing of the agreement, a portion due upon completion of certain milestones, and the final payment due upon final plat approval or sale of the subdivision. The payments are non-refundable. The agreements are generally recorded against the land with the appropriate recorder's office and must be assumed in the event of a sale or transfer of the land. The regional planning and coordination of the infrastructure in the various service areas has been an important part of the Company’s business model. Rate Decision No. 74364 requires a hook-up fee ("HUF") tariff to be established for all ICFAs that come due and are paid subsequent to December 31, 2013, which is a set amount per equivalent dwelling unit determined by the ACC based on the utility and meter size. As ICFA funds are generally received in installments, Rate Decision No. 74364 prescribes that 70% of funds received must be recorded as a HUF liability, with the remaining 30% to be recorded as deferred revenue, until the HUF liability is fully funded. The Company is responsible for assuring that the full HUF tariff, which is the set amount determined by the rate decision, is funded in the HUF liability, even if it results in recording less than 30% of the overall ICFA funds as deferred revenue. Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” for additional information on the accounting treatment of HUF. The Company believes that these services are not distinct in the context of the contract because they are highly interdependent with the regulated utilities ability to provide fitted capacity for water and wastewater services. The Company concluded that the goods and services provided under ICFA contracts constitute a single performance obligation. ICFA revenue is recognized at a point in time when the regulated utilities have the necessary capacity in place within its infrastructure to provide water/wastewater services to the developer. The Company exercises judgment when estimating the number of equivalent dwelling units that the regulated utilities have capacity to serve. As of March 31, 2023 and December 31, 2022, ICFA deferred revenue recorded on the consolidated balance sheet totaled $ 18.8 million and $ 21.0 million, respectively, which represents deferred revenue recorded for ICFA funds received on contracts. For the three months ended March 31, 2023, ICFA revenue recognized totaled $ 2.3 million. No ICFA revenue was recognized for the three months ended March 31, 2022. Disaggregated Revenues For the three months ended March 31, 2023 and 2022, disaggregated revenues from contracts with customers by major source and customer class are as follows (in thousands): -12- T a b l e o f C o n t e n t s Three Months Ended March 31, 2023 2022 REGULATED REVENUE Water Services Residential $ 3,891 $ 3,401 Irrigation 364 346 Commercial 285 284 Construction 127 121 Other water revenues 172 196 Total water revenues 4,839 4,348 Wastewater and recycled water services Residential 5,533 5,142 Commercial 281 270 Recycled water revenues 120 162 Other wastewater revenues 87 107 Total wastewater and recycled water revenues 6,021 5,681 TOTAL REGULATED REVENUE 10,860 10,029 UNREGULATED REVENUE ICFA revenues 2,268 — TOTAL UNREGULATED REVENUE 2,268 — TOTAL REVENUE $ 13,128 $ 10,029 Contract Balances The Company's contract assets and liabilities consist of the following (in thousands): March 31, 2023 December 31, 2022 CONTRACT ASSETS Accounts receivable Water services $ 1,394 $ 1,179 Wastewater and recycled water services 1,371 1,124 Total contract assets (1) $ 2,765 $ 2,303 CONTRACT LIABILITIES Deferred revenue - ICFA $ 18,774 $ 20,974 Refund liability - regulated (2) — — Total contract liabilities $ 18,774 $ 20,974 (1) The increase in accounts receivable was primarily due to increased connections through organic growth and rate increases resulting from Rate Decision No. 78644. Refer to Note 2— "Regulatory Decision and Related Accounting and Policy Changes" for further details. (2) The decrease in refund liability related to tax reform is due to the phase-in approach approved in Rate Decision No. 76901. Refer to Note 2— "Regulatory Decision and Related Accounting and Policy Changes" for further details. -13- T a b l e o f C o n t e n t s Remaining Performance Obligations Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted revenue expected to be recognized in future periods was approximately $ 18.8 million and $ 21.0 million at March 31, 2023 and December 31, 2022, respectively. Deferred revenue - ICFA is recognized as revenue once the obligations specified within the applicable ICFA are met, including construction of sufficient operating capacity to serve the customers for which revenue was deferred. Due to the uncertainty of future events, the Company is unable to estimate when to expect recognition of deferred revenue - ICFA. 4. LEASES On January 1, 2021, the Company adopted ASC 842 using the modified retrospective method. The Company elected the practical expedient package when scoping and identifying leases. As such, the Company has not reassessed: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) the initial direct costs for any existing leases. The Company notes that this practical expedient applies to all expired or existing contracts as of the effective date of the Company's adoption. The Company elected this practical expedient package for all lessee and lessor arrangements. The Company measures the lease liability at the present value of future lease payments, excluding variable payments based on usage or performance, and calculates the present value using implicit rates. Leases with an initial term of twelve months or less are not recorded on the balance sheet. During the year ended December 31, 2022, the Company entered into nine new finance leases for vehicles with either 48 or 60 month terms, all of which include a purchase option. January 10, 2022, the Company entered into a five-year finance lease for office equipment which expires on January 31, 2027. There is no purchase option in the lease agreement but the Company controls and obtains substantially all of the benefit from the identified asset. In December 2021, the Company entered into a new five-year corporate office lease agreement with a commencement date of May 1, 2022. The new monthly rent expense increased to $ 23,750 for each full calendar month commencing on May 1, 2022 through April 30, 2025 and will increase to $ 41,572 for each calendar month commencing on May 1, 2025 through April 30, 2027. On March 1, 2022 the Company amended the terms of the lease to incorporate construction of tenant improvements. Should the Company incur additional costs in excess of the landlord improvement allowance, the Company will have the option of paying the expenses at time of possession or amortized over the lease term as additional rent at three percent cost of funds. Rent expense arising from the operating leases totaled approximately $ 93,000 and $ 55,000 for the three months ended ended March 31, 2023 and 2022, respectively. The right-of-use ("ROU") asset recorded represents the Company’s right to use an underlying asset for the lease term and ROU lease liability represents the Company’s obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Right-of-use assets at March 31, 2023 and December 31, 2022 consist of the following (in thousands): March 31, 2023 December 31, 2022 Finance Leases $ 388 $ 405 Operating Lease 1,407 1,486 Total $ 1,795 $ 1,891 Lease liabilities at March 31, 2023 and December 31, 2022 consist of the following (in thousands): March 31, 2023 December 31, 2022 Finance Leases $ 542 $ 597 Operating Lease 1,465 1,524 Total $ 2,007 $ 2,121 -14- T a b l e o f C o n t e n t s 5. PROPERTY, PLANT AND EQUIPMENT Depreciable property, plant, and equipment at March 31, 2023 and December 31, 2022 consist of the following (in thousands): March 31, 2023 December 31, 2022 Equipment 56,720 55,178 Office buildings and other structures 54,999 54,647 Transmission and distribution plant 257,332 234,218 Total property, plant, and equipment 369,051 344,043 Depreciation of property, plant and equipment is computed based on the estimated useful lives as follows: Useful Lives Equipment 3 to 30 years Office buildings and other structures 30 years Transmission and distribution plant 10 to 50 years 6. ACCOUNTS RECEIVABLE Accounts receivable as of March 31, 2023 and December 31, 2022 consist of the following (in thousands): March 31, 2023 December 31, 2022 Billed receivables $ 2,765 $ 2,303 Less allowance for doubtful accounts ( 182 ) ( 164 ) Accounts receivable – net $ 2,583 $ 2,139 7. GOODWILL AND INTANGIBLE ASSETS Goodwill The goodwill balance was $ 10.9 million at March 31, 2023 and is related to the Turner, Red Rock, Mirabell, Francesca, Tortolita, Lyn Lee, Las Quintas Serenas, Rincon, Twin Hawks, and Farmers acquisitions. As of June 30, 2022, the Company reclassified approximately $ 0.8 million of goodwill to regulatory assets related to Red Rock Water, Red Rock Wastewater, and Turner Ranches acquisition premiums as a result of Rate Decision No. 78644 (refer to Note 2 - "Regulatory Decision and Related Accounting and Policy Changes" for additional information). The Farmers acquisition contributed $ 6.0 million to the change in the goodwill balance (refer to Note 15 - "Acquisitions" for additional information. There were no indicators of impairment identified as a result of the Company's review of events and circumstances related to its goodwill subsequent to the acquisitions. As of March 31, 2023 and December 31, 2022, the goodwill balance consisted of the following (in thousands): Goodwill balance, December 31, 2022 $ 4,957 Acquisition activity 5,956 Adjustments subsequent to acquisition date 16 Goodwill balance, March 31, 2023 $ 10,929 Intangible Assets Goodwill at March 31, 2023 and December 31, 2022, consisted of the following (in thousands): -15- T a b l e o f C o n t e n t s March 31, 2023 December 31, 2022 Gross Amount Accumulated Amortization Net Amount Gross Amount Accumulated Amortization Net Amount INDEFINITE LIVED INTANGIBLE ASSETS: CP Water Certificate of Convenience & Necessity service area 1,532 $ 1,532 $ 1,532 $ 1,532 Intangible trademark 13 13 13 13 Franchise contract rights 139 139 132 132 Organizational costs 87 87 87 87 1,771 1,771 1,764 1,764 DEFINITE LIVED INTANGIBLE ASSETS: Acquired ICFAs 17,978 ( 14,785 ) 3,193 17,978 ( 14,785 ) 3,193 Sonoran contract rights 7,406 ( 2,224 ) 5,182 7,406 ( 2,224 ) 5,182 25,384 ( 17,009 ) 8,375 25,384 ( 17,009 ) 8,375 Total intangible assets $ 27,155 $ ( 17,009 ) $ 10,146 $ 27,148 $ ( 17,009 ) $ 10,139 A Certificate of Convenience & Necessity ("CC&N") is a permit issued by the ACC allowing a public service corporation to serve a specified area, and preventing other public service corporations from offering the same services within the specified area. The CP Water CC&N intangible asset was acquired through the acquisition of CP Water Company in 2006. This CC&N permit has no outstanding conditions that would require renewal. Franchise contract rights and organizational costs relate to the 2018 acquisition of Red Rock and the 2023 acquisition of Farmers. Franchise contract rights are agreements with Pima and Pinal counties for Red Rock and Pima county for Farmers that allow the Company to place infrastructure in public right-of-way and permits expected to be renewable indefinitely. The organizational costs represent fees paid to federal or state governments for the privilege of incorporation and expenditures incident to organizing the corporation and preparing it to conduct business. Acquired ICFAs and contract rights related to the 2005 acquisition of Sonoran Utility Services, LLC assets are amortized when cash is received in proportion to the amount of total cash expected to be received under the underlying agreements. Due to the uncertainty of the timing of when cash will be received under ICFA agreements and contract rights, the Company cannot reliably estimate when the remaining intangible assets' amortization will be recorded. There was no amortization recorded for these balances for both the three months ended March 31, 2023 and 2022. 8. TRANSACTIONS WITH RELATED PARTIES The Company provides medical benefits to employees through its participation in a pooled plan sponsored by an affiliate of a significant shareholder and director of the Company. Medical claims paid to the plan were approximately $ 0.1 million for both the three months ended March 31, 2023 and 2022. Refer to Note 1 — "Description of Business, Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions — Public Offering of Common Stock" for additional information regarding other related party disclosures. 9. ACCRUED EXPENSES Accrued expenses at March 31, 2023 and December 31, 2022 consist of the following (in thousands): -16- T a b l e o f C o n t e n t s March 31, 2023 December 31, 2022 Deferred compensation $ 740 $ 818 Property taxes 1,834 1,195 Accrued project liabilities 949 1,585 Interest 1,722 483 Dividend payable 593 593 Asset retirement obligation 697 697 Accrued bonus 295 557 Customer prepayments 591 588 Accrued Professional Fees 285 60 Accrued Payroll 249 50 Other accrued liabilities 1,706 1,430 Total accrued expenses $ 9,661 $ 8,056 10. FAIR VALUE Fair Value of Financial Instruments FASB ASC 820, Fair Value Measurement , establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company's assumptions (unobservable inputs). The hierarchy consists of three levels, as follows: • Level 1 - Quoted market prices in active markets for identical assets or liabilities. • Level 2 - Inputs other than Level 1 that are either directly or indirectly observable. • Level 3 - Unobservable inputs developed using the Company's estimates and assumptions, which reflect those that the Company believes market participants would use. Financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 were as follows (in thousands): March 31, 2023 December 31, 2022 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Asset/Liability Type: HUF Funds - restricted cash (1) $ 304 $ — $ — $ 304 $ 161 $ — $ — $ 161 Demand Deposit (2) 1 — — 1 50 — — 50 Certificate of Deposit - Restricted (1) — 840 — 840 — 840 — 840 Acquisition Liability (3) — — 2,168 2,168 — — 838 838 Total $ 305 $ 840 $ 2,168 $ 3,313 $ 211 $ 840 $ 838 $ 1,889 (1) HUF Funds - restricted cash and Certificate of Deposit - Restricted are presented on the Restricted cash line item of the Company's consolidated balance sheets and are valued at amortized cost, which approximates fair value. The increase was primarily driven by additional funds received in growth areas of several utilities. (2) Demand Deposit is presented on the Cash and cash equivalents line item of the Company's consolidated balance sheets and is valued at amortized cost, which approximates fair value. (3) As part of the Red Rock acquisition, the Company is required to pay to the seller a growth premium equal to $ 750 (not in thousands) for each new account established within three specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten years after such first installation date, or twenty years from the acquisition date. The fair value of the acquisition liability was calculated using a discounted cash flow technique which utilized unobservable inputs developed using the Company's estimates and assumptions. Significant inputs used in the fair value calculation are as follows: year of the first meter installation, total new accounts per year, years to complete full build out, and discount rate . -17- T a b l e o f C o n t e n t s 11. DEBT The outstanding balances and maturity dates for short-term (including the current portion of long-term debt) and long-term debt as of March 31, 2023 and December 31, 2022 are as follows (in thousands): March 31, 2023 December 31, 2022 Short-term Long-term Short-term Long-term BONDS AND NOTES PAYABLE - 4.380 % Series A 2016, maturing June 2028 — 28,750 $ — $ 28,750 4.580 % Series B 2016, maturing June 2036 3,833 76,667 3,833 76,667 3,833 105,417 3,833 105,417 OTHER Debt issuance costs — ( 460 ) — ( 472 ) Total debt $ 3,833 $ 104,957 $ 3,833 $ 104,945 Debt is measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022 were as follows (in thousands): March 31, 2023 December 31, 2022 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Long-term debt (3) — 104,364 — 104,364 — 103,611 — 103,611 (3) The fair value of debt was estimated based on interest rates considered available for instruments of similar terms and remaining maturities. 2016 Senior Secured Notes On June 24, 2016, the Company issued two series of senior secured notes with an aggregate total principal balance of $ 115.0 million at a blended interest rate of 4.55 %. Series A carries a principal balance of $ 28.8 million and bears an interest rate of 4.38 % over a twelve-year term, with the principal payment due on June 15, 2028. Series B carries a principal balance of $ 80.5 million and bears an interest rate of 4.58 % over a 20 -year term. Series B was interest only for the first five years, with $ 1.9 million principal payments paid semiannually thereafter beginning December 2021. The senior secured notes are collateralized by a security interest in the Company’s equity interest in its subsidiaries, including all payments representing profits and qualifying distributions. Debt issuance costs totaled $ 0.5 million as of both March 31, 2023 and December 31, 2022. The senior secured notes require the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. Consolidated EBITDA is calculated as net income plus depreciation and amortization, taxes, interest and other non-cash charges net of non-cash income. Consolidated debt service is calculated as interest expense, principal payments, and dividend or stock repurchases. The senior secured notes also contain a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25 . However, for the quarter ended June 30, 2021 through the quarter ending March 31, 2024, the debt service ratio drops to 1.20 . The debt service ratio increases to 1.25 for any fiscal quarter during the period from and after June 30, 2024. As of March 31, 2023, the Company was in compliance with its financial debt covenants. Revolving Credit Line On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation (the "Northern Trust Loan Agreement"), for a two-year revolving line of credit initially up to $ 10.0 million with an initial maturity date of April 30, 2022. This credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand the Company’s business, and for general corporate purposes, initially bore an interest rate equal to London Interbank Offered Rate (LIBOR) plus 2.00 % and has no unused line fee. On April 30, 2021, the Company and The Northern Trust Company entered into an amendment to the Northern Trust Loan Agreement pursuant to which, among other things, the maturity date for the Company's revolving credit line was extended from April 30, 2022 to April 30, 2024. As of March 31, 2023 and December 31, 2022, the outstanding borrowings on this credit line were $ 3.5 million and $ 0 , respectively. There were approximately $ 8,000 and $ 9,800 unamortized debt issuance costs as of March 31, 2023 and December 31, 2022, respectively. -18- T a b l e o f C o n t e n t s The Northern Trust Loan Agreement requires the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. The Northern Trust Loan Agreement also contains a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25 . However, for the quarter ending June 30, 2021 through the quarter ending March 31, 2024, the ratio drops to 1.20 . As of March 31, 2023, the Company was in compliance with its financial debt covenants. On July 26, 2022, the Company and The Northern Trust Company entered into the second amendment (the "Second Modification Agreement") to the Northern Trust Loan Agreement, which, among other things, further extended the scheduled maturity date for the revolving line of credit from April 30, 2024 to July 1, 2024, increased the maximum principal amount available for borrowing from $ 10.0 million to $ 15.0 million, and replaced the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR). In 2020, Accounting Standards Update (ASU) 2020-04 was issued establishing ASC 848, Reference Rate Reform, and in 2021 ASU 2021-01 was issued, Reference Rate Reform (Topic 848): Scope (collectively, ASC 848). ASC 848 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASC 848 is optional and may be elected over time as reference rate reform activities occur. In 2022, ASU 2022-06 was issued, Deferral of the Sunset Date of Topic 848 (ASU 2022-06), to defer the sunset date of ASC 848 to December 31, 2024. ASU 2022-06 is effective immediately for all companies. The Company continues to evaluate the impact of ASC 848. At March 31, 2023, the remaining aggregate annual maturities of debt and minimum lease payments under finance lease obligations are as follows (in thousands): Debt Finance Lease Obligations 2024 $ 3,800 $ 144 2025 3,789 159 2026 3,789 135 2027 3,789 95 2028 3,789 9 Thereafter 89,834 — Subtotal 108,790 542 Less: amount representing interest — — Total $ 108,790 $ 542 12. INCOME TAXES During the three months ended March 31, 2023, tax expense of $ 0.9 million was recorded on pre-tax income of $ 3.3 million for the three months ended March 31, 2023, and tax expense of $ 0.3 million was recorded on pre-tax income of $ 1.2 million for the three months ended March 31, 2022. The income tax provision was computed based on the Company’s estimated effective tax rate and forecasted income expected for the full year, including the impact of any unusual, infrequent, or non-recurring items. The Company's effective tax rate decreased during the three months ended March 31, 2023. 13. DEFERRED COMPENSATION AWARDS Stock-based compensation Stock-based compensation related to option awards is measured based on the fair value of the award. The fair value of stock option awards is determined using a Black-Scholes option-pricing model. The Company recognizes compensation expense associated with the options over the vesting period. 2017 stock option grant -19- T a b l e o f C o n t e n t s In August 2017, GWRI's Board of Directors granted stock options to acquire 465,000 shares of GWRI's common stock to employees throughout the Company. The options were granted with an exercise price of $ 9.40 , the market price of the Company's common shares on the NASDAQ Global Market at the close of business on August 10, 2017. The options vested over a four-year period, with 25 % having vested in August 2018, 25 % having vested in August 2019, 25 % having vested in August 2020, and 25 % having vested in August 2021. The options have a 10 -year life. The Company expensed the $ 1.1 million fair value of the stock option grant ratably over the four-year vesting period. As of August 2021, these options were fully expensed. As of March 31, 2023, 77,454 options have been exercised and 69,225 options have been forfeited with 318,321 options outstanding. 2019 stock option grant In August 2019, GWRI's Board of directors granted stock options to acquire 250,000 shares of GWRI's common stock to employees throughout the Company. The options were granted with an exercise price of $ 11.26 , the market price of the Company's common shares on the NASDAQ Global Market at the close of business on August 13, 2019. The options vest over a four-year period, with 25 % having vested in August 2020, 25 % having vested in August 2021, 25 % having vested in August 2022, and 25 % vesting in August 2023. The options have a 10-year life. The Company will expense the $ 0.8 million fair value of the stock option grant ratably over the four-year vesting period. Stock-based compensation expense of $ 0.04 million and $ 0.05 million was recorded for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, 27,217 options have been exercised and 23,782 options have been forfeited with 199,001 options outstanding. A summary of stock option activity is as follows (in thousands, except option prices and years): Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value Options Outstanding at December 31, 2021 520 $ 10.12 6.6 $ 3,635.4 Options Vested at December 31, 2021 420 $ 9.84 6.2 $ 3,050.9 Granted — Exercised ( 2 ) $ 9.61 Forfeited — $ 11.26 Options Outstanding at December 31, 2022 518 $ 10.12 5.4 $ 1,638.4 Options Vested at December 31, 2022 468 $ 10.00 5.3 $ 1,537.6 Granted — Exercised ( 1 ) $ 11.26 Forfeited — Options Outstanding at March 31, 2023 517 $ 10.12 5.2 $ 1,198.1 Options Vested at March 31, 2023 468 $ 9.99 5.0 $ 1,139.7 Phantom stock/Restricted stock units compensation Restricted stock units are granted in the first quarter based on the prior year's performance and vest over a three year period. The units are credited quarterly using the closing price of the Company's common stock on the applicable record date for the respective quarter. The following table details total awards granted and the number of units outstanding as of March 31, 2023, along with the amounts paid to holders of the phantom stock units ("PSUs") and/or restricted stock units ("RSUs") for the years ended March 31, 2023 and 2022 (in thousands, except unit amounts): Amounts Paid For the Three Months Ended March 31, Grant Date Units Granted Units Outstanding 2023 2022 Q1 2019 32,190 — — 45 Q1 2020 22,481 — 24 31 Q1 2021 (1) 27,403 8,924 30 38 Q1 2022 (1) 22,262 14,841 25 — Q1 2023 (1) 30,366 30,366 — — Total 134,702 54,131 $ 79 $ 114 -20- T a b l e o f C o n t e n t s (1) Pursuant to the Global Water Resources, Inc. 2020 Omnibus Incentive Plan, effective May 7, 2020, long-term incentive awards are no longer granted in the form of PSUs and are granted as RSUs instead. Stock appreciation rights compensation The following table details the recipients of the stock appreciation rights ("SARs") awards, the grant date, units granted, exercise price, outstanding units as of March 31, 2023 and amounts paid during the three months ended March 31, 2023 and 2022 (in thousands, except unit and per unit amounts): Amounts Paid For the Three Months Ended March 31, Recipients Grant Date Units Granted Exercise Price Units Outstanding 2023 2022 Members of Management (1)(2) Q1 2015 299,000 $ 4.26 45,500 $ 165 $ 62 Key Executives (2)(4) Q2 2015 300,000 $ 5.13 — — — Members of Management (1)(3) Q3 2017 103,000 $ 9.40 17,000 — — Members of Management (1)(4) Q1 2018 33,000 $ 8.99 8,250 — — Total 735,000 70,750 $ 165 $ 62 (1) The SARs vest ratably over 16 quarters from the grant date. (2) The exercise price was determined to be the fair market value of one share of GWRC stock on the grant date of February 11, 2015. (3) The exercise price was determined to be the fair market value of one share of GWRI stock on the grant date of August 10, 2017. (4) The exercise price was determined to be the fair market value of one share of GWRI stock on the grant date of March 12, 2018. For the three months ended March 31, 2023 and 2022, the Company recorded approximately $ 0.0 million and $ 0.1 million of compensation expense related to the PSUs/RSUs and SARs, respectively. These are liability awards, so when the stock price decreases, cumulative compensation expense is reduced, which can lead to negative compensation in a given period. Based on GWRI’s closing share price on March 31, 2023 (the last trading date of the quarter), deferred compensation expense to be recognized over future periods is estimated for the years ending December 31 as follows (in thousands): RSUs / PSUs 2023 $ 248 2024 219 2025 126 Total $ 593 Restricted stock compensation On May 7, 2020, the Company's stockholders approved the Global Water Resources, Inc. 2020 Omnibus Incentive Plan which allows restricted stock awards as a form of compensation. A restricted stock award ("RSA") represents the right to receive a share of the Company's common stock. RSAs vest over two to three years , beginning on the date of the grant. The Company assumes that forfeitures will be minimal and recognizes forfeitures as they occur, which results in a reduction in compensation expense. During the three months ended March 31, 2023, no RSAs were issued. The Company recorded approximately $ 0.3 million of compensation expense related to the grant and partial vesting of RSAs for the three months ended March 31, 2023. During the three months ended March 31, 2022, no RSAs were issued. The Company recorded approximately $ 0.3 million of compensation expense related to the grant and partial vesting of RSAs for the three months ended March 31, 2022. The following table summarizes the RSA transactions for the three months ended March 31, 2023: Number of RSAs Weighted Average Fair Value Nonvested RSAs at the beginning of period 192,467 $ 14.88 Granted 0 Vested 0 Forfeited 1,067 14.13 Nonvested RSAs at the end of period 191,400 $ 14.88 -21- T a b l e o f C o n t e n t s 14. SUPPLEMENTAL CASH FLOW INFORMATION The following is supplemental cash flow information for the three months ended March 31, 2023 and 2022 (in thousands): For the Three Months Ended March 31, 2023 2022 Supplemental cash flow information: Cash paid for interest $ 23 $ 2 Non-cash financing and investing activities: Capital expenditures included in accounts payable and accrued liabilities $ 185 $ 602 Business acquisition through issuance of contingent consideration payable $ 1,330 $ — 15. ACQUISITIONS Acquisition of Farmers Water Company On February 1, 2023, the Company acquired all of the equity of Farmers Water Co., an operator of a water utility with service area in Pima County, Arizona, for a total consideration of $ 7.6 million; $ 6.2 million in cash plus a growth premium estimated at $ 1.4 million. The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles of CC&N service area in Sahuarita, Arizona and the surrounding unincorporated area of Pima County. The acquisition was accounted for as a business combination under ASC 805, "Business Combinations" and the purchase price was allocated to the acquired utility assets and liabilities based on the acquisition-date fair values. Fair values are determined in accordance with ASC 820 "Fair Value Measurement," which allows for the characteristics of the acquired assets and liabilities to be considered, particularly restrictions on the use of the asset and liabilities. Regulation is considered both a restriction on the use of the assets and liabilities, as it relates to inclusion in rate base, and a fundamental input to measuring the fair value in a business combination. Substantially all the Company's operations are subject to the rate-setting authority of the ACC and are accounted for pursuant to accounting guidance for regulated operations. The rate-setting and cost recovery provisions currently in place for the Company's regulated operations provide revenues derived from costs, including a return on investment of assets and liabilities included in rate base. As such, the fair value of the Company's assets and liabilities subject to these rate-setting provisions approximates the pre-acquisition carrying values and does not reflect any net valuation adjustments. Under the terms of the purchase agreement, the Company is obligated to pay the seller a growth premium equal to $ 1,000 for each new account established in the service area, up to a total aggregate growth premium of $ 3.5 million. The obligation period of the growth premium commences on the closing date of the acquisition and ends ten years after the first new account for residential purposes is established on land that is, at the time of the closing date of the acquisition, undeveloped or un-platted and owned by the seller within the service area or ten years after the date of closing if a new account (as previously described) has not been established. -22- T a b l e o f C o n t e n t s A preliminary purchase price allocation of the net assets acquired in the transaction is as follows (in thousands): Net assets acquired: Cash $ 28 Accounts receivable 72 Property, plant and equipment 10,386 Construction work-in-progress 126 Prepaids 8 Intangibles 1 7 Other taxes ( 35 ) Other accrued liabilities ( 44 ) Developer deposits ( 22 ) AIAC ( 1,481 ) CIAC ( 7,425 ) Total net assets assumed 1,620 Goodwill 5,956 Total purchase price $ 7,576 1 Intangibles consist of franchise contract rights and organization costs. Refer to Note 7 — "Goodwill & Intangible Assets" for additional information regarding the intangibles. The goodwill reflects the value paid primarily for the long-term potential for connection growth as a result of the Company’s increased scale and diversity, opportunities for synergies, and an improved risk profile. While the Company uses the best available estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, such estimates are inherently uncertain and subject to refinement. Events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. As a result, during the one-year measurement period from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Any adjustments subsequent to the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, will be recorded to the Company’s Condensed Consolidated Statements of Operations. 16. COMMITMENTS AND CONTINGENCIES Commitments The Company has operating and finance leases for vehicles, office equipment, and office space. Refer to Note 4 – “Leases” for additional information. On October 16, 2018, the Company completed the acquisition of Red Rock, an operator of a water and a wastewater utility with service areas in the Pima and Pinal counties of Arizona. Under the terms of the purchase agreement, the Company is obligated to pay to the seller a growth premium equal to $ 750 for each new account established within three specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten years after such first installation date or twenty years from the acquisition date. As of March 31, 2023, no meters have been installed and no accounts have been established in any of the three growth premium areas. Contingencies From time to time, in the ordinary course of business, the Company may be subject to pending or threatened lawsuits in which claims for monetary damages are asserted. Management is not aware of any legal proceeding of which the ultimate resolution could materially affect the Company's financial position, results of operations, or cash flows. -23- T a b l e o f C o n t e n t s